The Netherlands’ giant pension funds, already among the largest pools of investment capital in Europe, look set to get even bigger.

Having abdicated as Queen, Princess Beatrix is now the most famous pensioner in the Netherlands

Dutch regulators, commentators and the funds themselves all agree that the number of pension funds in the country – which has already fallen from over 1,000 in 1992 to 382 today – is set to contract further. According to an estimate from the Dutch central bank, DNB, which regulates the funds, the number could drop below 300 within a few years.

DNB has written to 60 small and medium funds, it said last month, urging them to consider their “long-term viability”. The regulator added that it “may ask more funds to examine the sustainability of their business models” this year, and “take appropriate measures”.

The UK has about twice as much money saved up in its workplace pension funds – €1.9 trillion, compared with the Dutch €950 billion – but spread out over tens of thousands of individual funds.

The prospect of further consolidation among Dutch pension funds could lead to job cuts among actuaries, investment consultants and administrators.
But it could also prefigure a tougher stance on fees and costs, with big funds able to gang up on asset managers and pressure them for the best deal.

Late last month, the €115 million pension fund for Dutch Space, an aerospace company involved in making the European Space Agency’s Vega rockets, became the latest to follow the trend. It announced it would merge into the larger Pensioenfonds Metalektro, or PME, an industry-wide pension fund for the metalworking and engineering industries, which has €34 billion under management.

Koos Haakma, transition manager at PME, said consolidation among funds was “already going pretty fast, and it will go faster”. He said many international companies with a Dutch subsidiary had opted out of running a separate fund in the Netherlands, and instead were merging into an industry scheme such as his own. In recent years, German electronics group Siemens and the industrial conglomerate Stork have both merged their Dutch funds into PME.

According to Jacqueline Lommen, director of European pensions at Dutch asset manager Robeco, pension funds have come under significant cost and regulatory pressure in recent years.

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She said: “The regulatory burden has grown over time. It’s difficult to handle all the requirements nowadays, it’s difficult to find trustees who are willing to serve on pension fund boards, and the execution and administrative costs are also higher for smaller schemes.”

This has become particularly acute as cheaper alternatives to the traditional pension arrangement have been developed, she said, such as a new kind of “lean” defined contribution provider known as the PPI, introduced in 2011.

And in June this year, the government is to propose a further option for consolidation – a new institution known as an algemeen pensioenfond or APF, which allows two or more schemes with different employers, terms and conditions, and funding levels to be merged into a single pension institution, but with their assets and liabilities ring-fenced.

One of the commonly cited benefits of mergers is economies of scale on fees and costs – and if that sounds ominous to fund managers, it probably should. Also last month, Peter Borgdorff, chairman of the country’s second-largest fund, healthcare workers’ scheme Pensioenfonds Zorg en Welzijn, or PFZW, caused a minor stir when he set out an ambition to insert new “malus”, or clawback, clauses into fund managers’ contracts, so schemes could get refunds on fees in the case of significant underperformance.

Jan Willem van Oostveen, investment policy manager at PFZW, said the idea was still in its “exploration phase”. He said: “PFZW wants to start a debate about this principle with the investment industry.” The country’s biggest fund, the €309 billion civil service workers’ fund ABP, has also said it wants to work with PFZW on this idea.

Consolidation is almost certain to lead to job cuts in other areas, as investment consultants and actuaries will have fewer clients. Theo Kocken, chief executive of Dutch consultancy Cardano, said he “would not be surprised” if a quarter of jobs in the industry disappeared over the next decade.

Evert van Ling, head of the Dutch office at pensions consultancy Lane Clark & Peacock, agreed this was a challenge: “There is pressure in the market on actuarial firms. For every consultancy it’s necessary to think about the future, to look at your own client base and ask, what are the chances these schemes will merge?”

The scheme mergers are taking place against a wider backdrop of change, as the nature of pensions themselves also shifts. Like the UK, the Netherlands is moving from a system of defined benefits, where pensions are guaranteed, to a system of defined contributions, where they depend on market returns.

But unlike the UK, where companies unilaterally shut DB schemes and opened DC plans for new joiners, in the Netherlands, the existing pension funds are being changed, slowly and not without considerable controversy, from DB to DC.

Pension reforms

Initially, the Dutch government proposed giving pension funds two options to reform themselves; first, to offer a non-inflation linked “nominal” pension as a firm guarantee, or second, to offer a “real” or inflation-linked pension as a non-guaranteed ambition. PFZW came out strongly in favour of the latter, only to find the government then retreated.

Niels Kortleve, innovation manager at PGGM Investments, the asset manager for the PFZW scheme, said: “The ministry of social affairs has proposed a ‘middle of the road’ approach, which is closer to the nominal position. It’s not as ‘hard’ a nominal contract as previously proposed, as some solvency rules have been relaxed slightly.”

Nevertheless, the option of more radical DC reform is not entirely off the table, he said. With support from the ministry, the pensions industry has set up a working group to examine the question.

Robeco’s van Lommen is a member of the group. She said: “We are looking into a so-called collectieve premieovereenkomst. This is a true DC scheme from a legal perspective, which uses DC individual accounts and is IFRS proof [meaning employers carry no pension liability on their balance sheets].

However, in the payout phase there will be collective risk sharing of financial and biometric risks – a bit like a variable annuity.

“In order to make this feasible, we need a legislative change, a bit similar to the one that has been implemented in the UK: if macro longevity increases, benefits are allowed to be lowered.”

This article originally appeared in the print edition of Financial News dated May 5, 2014